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Crowdlending provides new financing option for SMEs

Friday, April 17, 2015 - 05:50
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Moolahsense co-founder Lawrence Yong (left) and Mark Phooi, CEO of First Media Design School, the second company to be successfully funded on the crowdlending platform.

Singapore

CROWDLENDING, otherwise known as peer-to-peer lending or debt crowdfunding, is increasingly a viable source of alternative financing for SMEs and startups here, what with the launch of new crowdlending platform Capital Match this week, just five months after MoolahSense (Singapore's first such platform) debuted last November.

Both homegrown platforms, Capital Match and MoolahSense allow individuals - not limited to accredited or institutional investors - to lend directly to businesses in exchange for a fixed return. This is unlike equity or securities crowdfunding, which allows individuals to invest in companies in return for shares, and will be restricted to accredited or institutional investors under a proposed framework by the Monetary Authority of Singapore.

Since its inception, MoolahSense has listed three campaigns to date, all of which have been successfully funded. Ranging from edutech to Korean fare, the companies have collectively raised S$550,000, with the highest-funded campaign yielding S$302,000 for a borrower that had wanted just S$200,000. The interest rate was 10 per cent per year.

Capital Match, its youth notwithstanding, has listed two campaigns, both of which have achieved their target amounts with interest rates of around 2.4 per cent per month.

While interest rates on MoolahSense are decided based on the highest rate proposed by investors at the campaign's close, those on CapitalMatch are pre-determined and made known at the campaign's launch.

"We set the interest rate on each loan (which is agreed by the borrower) before we list it, and investors participate on a first-come first-served basis. There is no auction process. We prefer this risk-based pricing approach vs one where pricing is auction or market-driven. Our investors also like this for its certainty," said Capital Match co-founder Kevin Lim.

Interestingly, investors on Capital Match may come to know of the borrower's name only after the campaign has been successfully funded. According to Mr Lim, this is not an industry practice but it serves to protect the borrower's privacy, as the latter may not wish to disclose its fundraising plans to the general public. But details ranging from the borrower's key financials to its DP credit rating will be made public at the campaign's launch.

On both platforms, the minimum investment sum is S$1,000. Capital Match has amassed over 100 investors, while MoolahSense has secured some 1,000 investors, BT has learnt.

"On average, about 30 per cent of the investors are from the borrower's own inner circle, namely friends, family and business associates. Crowdlending provides businesses the opportunity to harness existing relationships and also to enrol more stakeholders into its network," said MoolahSense founder Lawrence Yong.

Crowdlending also fills a gap in the banking ecosystem, according to Capital Match's Mr Lim, who added that only about 13 per cent of loan applications made by SMEs in 2012 were reportedly approved.

"To bridge this gap, we're exploring partnering banks, such that they will refer borrowers they reject to us, and vice versa. Also, we hope to help these borrowers build up a credit history and eventually be able to go back to banks for a loan. No one can beat a bank's interest rate, so this would be a great outcome for the borrower."

When queried, Mr Yong said MoolahSense is also in talks with banks on possible partnerships.

The company had in March raised an undisclosed amount of seed funding from East Ventures and Pix Vine Capital, while Capital Match is said to be about to close a "high, six-figure" seed funding round led by a Singapore government agency - in what market watchers say is only a testament to the potential and returns of crowdlending.

"Small businesses that have shown a proven business model and are keen to expand. . . will enjoy easier criteria in getting funding and the ability to raise capital flexibly. . . while investors get a new instrument to make good returns and support promising startups," said Christopher Quek, director of Angel's Gate Advisory.

But with high interest rates (up to 24 per cent per year), businesses must be financially disciplined in executing their business plans and deliver repayments, he cautioned.

"Crowdlending is also definitely not for the faint-hearted (lenders). Businesses may ask for funds but they may fold any time given the inherent risks of a small business. Lenders should not make crowdlending a major source of their income. They should do it more on the basis of angel investing rather than seeking high returns," said Mr Quek.

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